Investing

Markets hit records as confidence rises and other news affecting your money in the week ahead

Twenty/20

A majority of Americans believe the U.S. is less safe in the wake of attacks between the U.S. and Iran, but you wouldn't know it from looking at the performance of the stock market.

While tensions between the two countries appear to have cooled, a USA Today/Ipsos poll shows that 55% of Americans say the U.S is less safe after the killing of Iranian Gen. Qasem Soleimani. Still, the major stock benchmarks have set fresh highs in the past week.

Already this month, the S&P 500 is up more than 1.6%, building upon a rally of nearly 29% for this index in 2019. And the two major themes in market outlook for January are on the calendar in the week ahead: a phase one trade deal between the U.S. and China, which is expected January 15 or shortly thereafter, and the start of earnings season.

In addition to a report on retail sales in December, which includes the all-important holiday shopping season, traders will monitor two key surveys of confidence — one measuring sentiment among U.S. consumers and the other of small business owners — and two reports on inflation for the month of December.

Here's what to watch in the stock market during the week ahead — and how the news could affect your bottom line.

Economists expect confidence is rising

What's happening: There's been an interesting divergence in sentiment recently: While CEO confidence in the economy has cratered, consumers still feel optimistic. This week, traders will get to see if this gap in sentiment has continued to widen.

First up is a monthly report that measures confidence among small business owners, which is scheduled for release on Tuesday by the National Federation of Independent Business. That's followed on Friday by a closely watched survey from the University of Michigan, which measures confidence among consumers. Economists currently project that this measure increased for January.

Why it matters: Traders and economists watch surveys like these closely because when consumers or company leaders feel less confident, they may pull back on spending on big-ticket items or hiring decisions — and that ultimately affects the pace of gross domestic product (GDP) growth. Businesses with fewer than 500 workers account for almost half of private sector employment, while consumer spending accounts for more than two-thirds of GDP.

What it means for you: Confidence is just one piece of a broader puzzle that economists piece together to get a sense of how the economy is faring. The gains in the stock market, even in the wake of the U.S.-Iran tensions, shows that traders have brushed off these concerns.

However, if consumers and business owners are less confident about the future, that could have an impact on the broader economy and the stock market. Recent reports showed that U.S. employers added fewer workers in December than economists had projected, while the number of unemployed surged to a more than 1½-year high.

If consumers and business owners are less confident about the future, that could have an impact on the broader economy and the stock market.

Inflation picked up in December

What's happening: Two inflation reports are scheduled for release in the week ahead. Tuesday's measures the average change in consumer prices, or what you pay for various goods and services, including food and housing. Wednesday's report focuses on producers and the average change in prices these companies set for the products they sell.

Economists currently project that consumer prices jumped the most since October 2018 on a year-over-year basis, while producer prices increased the most since September.

Why it matters: The Federal Reserve is tasked with keeping prices in check and closely tracks changes in prices for goods and services. They monitor a measure that excludes food and energy, which tend to have more wild price swings.

Even so, the Fed tracks a different measure of inflation — the core personal consumption (PCE) price index — for its long-term target of 2%, and that's still below that level at 1.6% as of November. Policymakers cut interest rates in 2019, citing inflation as a factor, but prices have yet to pick up materially.

What it means for you: When prices go up, our dollars don't stretch as far when we're buying groceries or paying for services. The Fed closely monitors changes in the cost of living to decide whether further rate cuts are warranted. While policymakers intend to keep their policy on hold unless the outlook for the economy changes, some experts believe rising commodity prices could create an "inflation scare" that might warrant the Fed to hike rates again. Traders don't see a greater than 20% chance of any rate change, either a cut or a hike, until at least June.

The bottom line

The stock market has started January doing what it did much of 2019: going up. The S&P 500 posted its best year since 2013 with gains of nearly 29%, capping off a decade that was remarkable for the U.S. stock market.

Even so, some experts have warned that the market's strong start to the year makes it vulnerable to a slump. Even if the stock market's gains slow in 2020, as experts expect, long-term investors should stay invested.

In fact, any turbulence in the market can be a good opportunity for long-term investors to buy stocks at lower prices. And no matter what happens in any given week, it's important to keep perspective and remain consistent with your investment strategy.

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